US dollar posts multi-week losses on fears of prolonged shutdown

The dollar retreated, posting multi-week losses, as the U.S. government shutdown delayed critical economic data and raised concerns over U.S. governability, compounded by a stalled services sector. This weakness saw the euro, sterling, and Swiss franc gain, pushing the dollar index to its worst weekly performance since July. The economic deceleration and data delays solidified market expectations for nearly two more Fed rate cuts this year, with a 25 bps cut in October deemed highly probable, despite some divergent views among Fed officials. Concurrently, the yen experienced mixed trading, influenced by BOJ Governor Ueda's cautious outlook and the upcoming Japanese Liberal Democratic Party election.

Analysis

NEW YORK, Oct 3 (Reuters) - The dollar retreated on Friday, posting multi-week losses against major currencies, as uncertainty surrounding a U.S. government shutdown clouded the outlook and delayed key data releases, such as payrolls, critical for gauging the economy's direction. The U.S. nonfarm payrolls report for September was due for release on Friday, but was not published due to the government closure. The Reuters Gulf Currents newsletter brings you the latest on geopolitics, energy and finance in the region. Sign up here. The yen pulled back from this week's highs as traders mulled the Bank of Japan's next move ahead of a ruling party leadership election this weekend. Advertisement · Scroll to continue In late afternoon trading, the euro rose 0.2% against the dollar to $1.1743 , headed for its best week in a month. Gains in the euro pushed the dollar index , which measures the greenback against a basket of key currencies, 0.1% lower at 97.69. The index had its worst weekly showing since July. "If the shutdown lasts for a long time, and I mean by several weeks, yes, then, of course, people will begin to question governability in the U.S., said Thierry Wizman, global FX and rates strategist, at Macquarie in New York. "And anytime that the market starts to worry about governability in that country, it usually is not a good story for the currency." Advertisement · Scroll to continue Against the Swiss franc, the dollar fell 0.3% to 0.7951 francs , down 0.4% on the week, its largest weekly fall since mid-August. The dollar also slid against sterling, which rose 0.3% to $1.3479 . The pound posted its biggest weekly gain since August 11. "We're still in a range. I think there's just a lack of directional momentum, and the fact that the government is shut down only adds to the low volatility environment," said Vassili Serebriakov, FX strategist at UBS in New York. The U.S. currency slightly extended its fall against major currencies after data showed U.S. services sector activity stalled in September amid a sharp slowdown in new orders. The Institute for Supply Management said its non-manufacturing purchasing managers' index (PMI) fell to 50 last month, the breakeven level between growth and contraction, from 52.0 in August. Economists polled by Reuters had forecast the services PMI easing to 51.7. In other FX pairs, the dollar edged higher against the yen, up 0.1% at 147.41 yen, having earlier fallen as much as 0.4%. It rose 1.4% this week, which would be the biggest since mid-May. BOJ Governor Kazuo Ueda struck a cautious tone in comments about the global economy, lowering expectations of an imminent rate hike. Markets were also focused on a Liberal Democratic Party election on Saturday that will determine Japan's next prime minister. The LDP election has consequences for Japan's budget and central bank policies. Among the front-runners, dovish party veteran Sanae Takaichi could trigger more bond market uncertainty, while farm minister Shinjiro Koizumi and top government spokesperson Yoshimasa Hayashi are less likely to rock the boat. TWO MORE FED RATE CUTS EXPECTED THIS YEAR Traders see a 25 basis-point (bp) cut at the Federal Reserve's October meeting as almost certain. Overall, the rate futures market has priced in about 47 bps of rate declines for the remainder of the year or just under two cuts, according to LSEG calculations. Fed Governor Stephen Miran on Friday again pressed for an aggressive path of rate cuts given big changes in the economy, while saying that the difference between his outlook and that of his central bank colleagues is not as great as some perceive it to be. Miran dissented in favor of a 50-basis-point rate cut at the Fed's policy-setting meeting last month. This week provided more evidence of sluggishness in the labor market, and more ammunition for the Fed to cut rates later this month. The ADP National Employment report on Wednesday showed private payrolls decreased by 32,000 in September. Dallas Fed President Lorie Logan on Friday, however, repeated her view that upside inflation risks, a labor market that is largely in balance and policy that is currently only modestly restrictive mean the central bank should not go ahead with further interest-rate cuts. In cryptocurrencies, bitcoin rose for an eighth straight session, hitting its highest level since August 13, when it touched a record high. It was last up 1.2% at $122.164.19. , bolstered by recent gains in U.S. equities and inflows into bitcoin exchange-traded funds. Currency bid prices at 3 October 08:24 p.m. GMT | ||||||| Description | RIC | Last | U.S. Close Previous Session | Pct Change | YTD Pct | High Bid | Low Bid | Dollar index | 97.698 | 97.823 | -0.12% | -9.95% | 97.949 | 97.601 | | Euro/Dollar | 1.1742 | 1.1715 | 0.22% | 13.4% | $1.176 | $1.1716 | | Dollar/Yen | 147.45 | 147.22 | 0.13% | -6.32% | 147.825 | 147.145 | | Euro/Yen | 173.14 | 172.5 | 0.37% | 6.08% | 173.24 | 172.44 | | Dollar/Swiss | 0.7953 | 0.7979 | -0.32% | -12.36% | 0.798 | 0.7948 | | Sterling/Dollar | 1.3481 | 1.3439 | 0.33% | 7.81% | $1.3488 | $1.343 | | Dollar/Canadian | 1.3951 | 1.3966 | -0.12% | -2.99% | 1.3969 | 1.394 | | Aussie/Dollar | 0.6603 | 0.6597 | 0.11% | 6.73% | $0.6614 | $0.659 | | Euro/Swiss | 0.9336 | 0.9345 | -0.1% | -0.61% | 0.9358 | 0.9336 | | Euro/Sterling | 0.8707 | 0.8713 | -0.07% | 5.25% | 0.8729 | 0.8708 | | NZ Dollar/Dollar | 0.5832 | 0.5818 | 0.28% | 4.25% | $0.5838 | 0.5814 | | Dollar/Norway | 9.9415 | 9.9592 | -0.18% | -12.53% | 9.9944 | 9.9242 | | Euro/Norway | 11.6745 | 11.6842 | -0.08% | -0.8% | 11.716 | 11.66 | | Dollar/Sweden | 9.3677 | 9.3945 | -0.29% | -14.97% | 9.4142 | 9.3509 | | Euro/Sweden | 10.998 | 11.0105 | -0.11% | -4.09% | 11.0325 | 10.9837 | Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Lucy Raitano in London and Rocky Swift in Tokyo; Editing by Alex Richardson, Peter Graff, Leslie Adler and Diane Craft Our Standards: The Thomson Reuters Trust Principles. The U.S. dollar experienced a significant retreat, marking its worst weekly performance since July, as a U.S. government shutdown introduced considerable uncertainty into the economic outlook. The shutdown has directly impacted market visibility by delaying the release of critical data, including the September nonfarm payrolls report, making it difficult to assess the economy's trajectory. This political headwind is compounded by weakening economic signals, notably the U.S. services sector activity stalling as the ISM non-manufacturing PMI dropped to the breakeven level of 50, missing forecasts of 51.7. Further evidence of a slowdown came from the ADP National Employment report, which showed a decrease of 32,000 in private payrolls. Consequently, markets have solidified expectations for further monetary easing, with rate futures pricing in a near-certain 25 basis-point cut at the Federal Reserve's October meeting and a total of 47 bps in cuts for the remainder of the year. While Fed Governor Miran advocates for aggressive cuts, Dallas Fed President Logan's contrasting view highlights internal policy division. The dollar's weakness fueled gains in other major currencies, with the euro rising 0.2% to $1.1743 and sterling gaining 0.3% to $1.3479. The Japanese yen's movement was more complex, influenced by BOJ Governor Ueda's cautious tone and political uncertainty ahead of the LDP leadership election.

Key Decisions for Investors

• Given the U.S. government shutdown and deteriorating economic data, investors should consider a cautious to bearish stance on the U.S. dollar, as prolonged political uncertainty could extend its weakness.
• The market has almost fully priced in a 25 basis-point Fed rate cut in October, but investors must monitor subsequent Fed communications closely due to divergent official viewpoints, which creates uncertainty for the policy path beyond the next meeting.
• While the dollar is broadly weak, the Japanese yen presents a nuanced trade; traders should exercise caution and monitor the outcome of Japan's LDP election, as it holds significant implications for future monetary and fiscal policy that could counter yen strength.
• Consider positions that benefit from relative strength against the dollar, such as long euro or sterling, which have shown strong weekly gains and are directly benefiting from the dollar's decline.